STEM (STEM) Q2 2026: Non-GAAP Margin Hits 55% as Software Mix Deepens
STEM’s Q2 2026 results reveal a business model pivot paying off, as software and edge hardware now dominate the revenue mix, driving record gross margins and sustained EBITDA gains. Operating leverage and disciplined cost controls are translating into positive cash flow, while international expansion and hybrid project wins set the stage for multi-year growth. Guidance is reaffirmed, but second-half margin compression looms as battery hardware resales ramp.
Summary
- Software-Centric Shift: Record gross margin and EBITDA gains underscore the growing impact of PowerTrack and edge hardware.
- Cost Discipline Delivers: Tight OPEX control and AI-driven efficiencies sustain operating leverage and positive cash flow.
- Hybridization Momentum: International bookings and hybrid project wins validate the platform’s expansion strategy into 2027.
Business Overview
STEM is a software-driven energy optimization company focused on grid-edge solutions for solar and storage assets. Its revenue is generated across three core segments: PowerTrack software (energy management and monitoring platform), edge hardware (control and integration devices), and managed/project services. The company’s business model is increasingly software-first, with a growing mix of recurring annual recurring revenue (ARR) from software and services, and a declining share of low-margin battery hardware resales. STEM’s PowerTrack platform is central to its value proposition, enabling asset owners to optimize, monitor, and hybridize solar and storage projects globally.
Performance Analysis
STEM’s Q2 2026 results showcase the operational and financial impact of its software-centric transformation. Total revenue declined year-over-year, driven by a sharp reduction in low-margin battery hardware resales, while software, services, and edge hardware revenue held steady and improved in mix. PowerTrack software revenue climbed 11% YoY, and edge hardware surged 22% YoY, reflecting the company’s expansion into utility-scale and hybrid projects. Managed services revenue fell against a tough prior-year compare, but overall recurring ARR continues to rise.
Gross margin reached a record 55% (non-GAAP), up from 49% a year ago, as higher-margin software and hardware mix offset the drag from battery hardware resales. Operating expenses remained flat sequentially and down YoY, reflecting continued cost discipline and AI-enabled efficiencies. Adjusted EBITDA rose 63% YoY, marking the fifth consecutive quarter of positive results, and operating cash flow turned positive, a $22 million improvement YoY. Bookings and backlog grew sequentially, with notable international wins in Latin America and Europe supporting the growth narrative.
- Revenue Mix Shift: Software and edge hardware now account for the vast majority of revenue, insulating margins from battery hardware volatility.
- International Expansion: New bookings in Chile and Hungary highlight traction for hybrid and utility-scale deployments.
- Cash Flow Inflection: Positive operating cash flow achieved, with further improvement expected as billings accelerate in the second half.
With recurring ARR and international bookings both rising, STEM’s margin and cash flow profile is structurally improved, though second-half results will see more battery hardware revenue and some margin dilution.
Executive Commentary
"The second quarter marked our fifth consecutive quarter of positive adjusted EBITDA. Our non-GAAP gross margin remains at record levels and we saw meaningful commercial momentum across the PowerTrack platform."
Arun Narayanan, CEO
"Nearly all of that decline came from lower battery hardware resale revenue... PowerTrak software revenue grew 11% year over year... Edge Hardware grew 22% year-over-year... Non-gap gross margin reached a record 55% up from 49% in the second quarter of 2025, driven by the continued shift of our product mix toward higher margin software, services, and edge hardware, and less from lower margin battery hardware resale."
Brian Musfeldt, CFO
Strategic Positioning
1. Software-First Model Drives Margin Expansion
STEM’s deliberate pivot to a software-first business model is now visible in the numbers. The PowerTrack platform, which provides energy management and monitoring for solar and storage assets, is driving both higher gross margins and recurring revenue growth. This shift reduces exposure to commoditized hardware sales and supports a more predictable, high-value revenue stream.
2. Hybridization and Utility-Scale Growth
Hybrid projects—combining solar, storage, and advanced controls—are a core growth vector. Recent wins in Chile and Hungary demonstrate the platform’s appeal for large-scale, complex deployments, and create opportunities for multi-product ARR as customers layer new software and hardware contracts over time. This hybridization trend increases wallet share per customer and deepens competitive moat.
3. International Expansion Accelerates TAM
STEM’s bookings now span six countries and three continents, with PowerTrack EMS recognized by industry awards and new projects coming online in Europe and Latin America. The company’s Berlin office and targeted partnerships (e.g., Nuvation Energy) provide local market access and technical credibility, supporting further geographic growth.
4. Operating Leverage and AI-Driven Efficiencies
Disciplined cost control and AI-enabled process improvements are sustaining flat OPEX even as the business grows. Management has proven its ability to deliver positive EBITDA and cash flow without cutting back on R&D or growth investments, setting a foundation for durable profitability as scale increases.
5. Product Innovation and Platform Extension
Recent product launches, such as PowerTrack Sage (AI assistant) and IONA (AI services), are expanding the platform’s capabilities and opening new monetization paths. Integration of the Raccoon acquisition (automated fault detection) is underway, with further updates expected in Q3. These moves reinforce STEM’s positioning as a technology leader in energy optimization.
Key Considerations
STEM’s Q2 2026 results reflect a company at an operational inflection, but several strategic considerations remain top of mind for investors.
Key Considerations:
- Margin Durability as Mix Shifts: Battery hardware resales will increase in the second half, pressuring margins, but software/edge hardware should remain dominant longer-term.
- ARR Growth and Customer Retention: PowerTrack ARR grew 13% YoY, but managed services ARR was flat; sustaining double-digit ARR growth is key for valuation.
- International Execution Risk: Early wins in Latin America and Europe need to scale, and local regulatory/policy shifts could introduce volatility.
- Hybrid Project Economics: Hybridization increases ARR and wallet share, but complexity and competition could compress margins or delay deployments.
- AI and R&D Investment: Continued investment in product innovation must balance near-term margin discipline with long-term differentiation.
Risks
STEM faces several execution and market risks as it scales. Increased reliance on hybrid and international projects introduces delivery and regulatory complexity, while battery hardware resales in the second half could dilute margin gains. U.S. policy changes (e.g., tariffs, FCC inverter rulings) have not yet impacted results, but remain a watchpoint. Sustaining ARR growth and customer adoption in a competitive, evolving energy technology landscape is critical for the long-term thesis.
Forward Outlook
For Q3 and Q4 2026, STEM guided to:
- Full-year revenue of $140–190 million (software, services, edge hardware: $130–150 million; battery hardware resales up to $40 million, likely at lower end)
- Non-GAAP gross margin of 40–50%, trending toward the high end due to revenue mix
- Adjusted EBITDA of $10–15 million, tracking toward the high end
- Operating cash flow of $0–10 million
- Year-end ARR of $65–70 million
Management reaffirmed all guidance, citing strong bookings, disciplined cost control, and seasonal revenue acceleration. Key swing factors are the timing and volume of battery hardware resales and the pace of hybrid project deployments.
- Second-half margin and EBITDA may compress as hardware mix rises
- International and utility-scale bookings expected to drive 2027 growth
Takeaways
STEM’s software-led pivot is now embedded in its financials, with recurring revenue and international expansion providing multi-year growth visibility.
- Margin Structure Reset: Record non-GAAP gross margin and positive cash flow validate the shift toward software and edge hardware, but investors should monitor for mix-driven volatility in H2.
- Hybrid and Global Growth: New project wins in Latin America and Europe, plus hybridization of legacy assets, are expanding STEM’s total addressable market and deepening customer relationships.
- 2027 and Beyond: The foundation is laid for utility-scale and international expansion, but execution on hybrid projects and ARR growth will determine the sustainability of the model.
Conclusion
STEM’s Q2 2026 results confirm a structural business model transition, with software and edge hardware now driving profitability and cash flow. The company is delivering on operating leverage, international expansion, and product innovation, but margin headwinds from hardware resales and execution risks in new markets remain key watchpoints for investors.
Industry Read-Through
STEM’s results highlight a broader industry shift toward software-driven energy management and hybrid asset optimization. The strong margin uplift from recurring software and edge hardware is a playbook for other energy technology firms seeking to escape hardware commoditization. Hybridization—layering storage and controls onto solar assets—is emerging as a growth driver across global markets, especially as policy uncertainty and tariff risks persist. Companies with platform extensibility, international reach, and AI-enabled solutions will be best positioned to capture the next wave of utility-scale and distributed energy opportunities. Investors should watch for similar margin and ARR inflection points at other grid-edge and clean tech platforms as the sector matures.